I understand that the demand increased for dollar in the past couple of years but still, with the recent 40% increase in its supply I would’ve expected some sort of a drop in value.
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Currency strength is relative – the US dollar can simultaneously lose purchasing power due to inflation (it is) and gain power relative to other currencies that are collapsing faster (they are).
Yeah the US has seen 10odd% inflation year over year, but so has the UK. Turkey is at a whopping 83%.
Many of the same inflationary pressures and policies are present in other countries too, and their currencies don’t have the same strength as the USD and have dropped even further, making the dollar “stronger” by comparison.
It’s relative increase.
The rest of the world turned on the printing press too and also didn’t produce as much for 2 years. And in times of shit like this, people look for some kind of *safer* reserve instead of their local dollarydoos and eurocoins, which they can feel losing value day by day, each time they go to the shops. America is still seen as relatively stable and safe, at least compared to the trash I’m being paid in.
So it increases in relative value. It’s not that you didn’t devalue your currency and print a tonne, its that the rest of the world did too and is in for some hard times and economic trouble, causing them to flee towards the us dollar.
The US has had a few economic policies that have ensured that when global economic outlook is bleak the traditionally safe investments are tied to USD. US T-bills, gold, and oil are often used as safer investment vehicles when the markets turn volatile. My understanding is that a lot of international transactions of gold and oil gets conducted using USD pricing even if the US is not at all involved. This all creates a demand on currency markets for USD which drives up the price.
I’m not an economist but looked into this when in the 2008 financial crisis the USD seriously outperformed other currencies. It seemed odd to me that the source of all of this bad debt on inflated fixed assets should have their currency rise against countries who in theory wouldn’t have been hit nearly as hard by the burst bubble.
The idea that the supply of dollars increased 40% in 2020 is wrong. (Although it did increase substantially.)
The data comes from the St Louis Fed, and it does show a massive increase in (iirc) March-May 2020. However when you see something strange like this you should question whether it’s really showing what you think.
And if you look into the detail – which isn’t exactly hidden away, it’s straight after the graph – you’ll see that it’s not actually a load of new dollars being created, it’s a change in what is counted within the “M1” supply.
There are different measures of “money”. M1 is the most “liquid” – basically meaning it can be spent easily and quickly. What the fed did was start counting a load of dollars in savings accounts as M1 money rather than M2 money. If you looked at the M2 money supply you’d see it going down by the same amount.
These kinds of savings accounts used to come with conditions like requiring notice before withdrawing money. However things have changed so it’s easier and quicker to withdraw money, making these accounts more “liquid”. This, in fact, does increase inflation (it increases the “velocity of circulation” – how fast money moves around the economy) – but it’s not something that happened all of a sudden in 2020 (and also it’s not something the government did).
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